Household respite as inflation falls to 2.8pc

Households were offered some respite as inflation fell in May more sharply
than expected to a two-and-a-half year low on the back of slowing price
rises for food, clothes and petrol – giving the Bank of England room to pump
more stimulus into the economy.

The consumer prices index fell from 3pc to 2.8pc, the lowest level since November 2009, confounding forecasts that it would remain flat on the month, according to the Office for National Statistics. The retail prices index, often used in wage negotiations, also dipped steeply from 3.5pc to 3.1pc - its lowest reading since December 2009.

Food and drink prices led the decline, rising by just 0.3pc between April and May compared with 1.3pc between the same two months the previous year, with fruit and vegetable prices actually falling.

Clothing and footwear prices also fell by 0.1pc between April and May compared with a rise of 0.4pc between the same two months a year ago “as sluggish demand continues to weigh on retailers pricing power”, Annalisa Piazza of Newedege Strategy said.

The sharp slowdown in inflation since September, when it peaked at 5.2pc, is taking pressure of household finances and giving the Bank the space to inject more stimulus into the economy. Government figures last week showed that average take-home pay fell by 3.1pc in the year to April 2011, the sharpest fall since 1981, leaving families no better-off than in 2005.

With households under pressure, consumer spending has collapsed – contributing to the double dip recession that has seen the economy shrink by 0.6pc in the six months to March.

Sir Mervyn King, the Bank’s Governor, last week indicated the Bank was poised to respond with more quantitative easing (QE), saying: “With signs of a deterioration in the outlook, especially in world markets, the case for a further monetary easing is growing.”The Bank ended its latest round of QE in May, having competed £325bn.

Philip Shaw, UK economist at Investec, said: “With inflation coming down sharply over the past couple of months, the economic data disappointing and global uncertainties rising, there doesn’t appear to be much cause to hold back.”

The Bank has forecast inflation would remain above its 2pc target until the second half of next year, falling to around 1.6pc in two years’ time. However, it is coming down more quickly than predicted – largely as a result of commodity prices for food and oil.

Chris Williamson, chief UK economist at Markit, said: “Slower global growth has caused oil prices to fall by around one-quarter since their peak earlier this year, with prices also falling for a wide variety of other commodities. This is not therefore a UK-specific easing in price pressures we are seeing, with inflation rates also coming down in all major economies, notably the US, China and the eurozone.”

He said he also expected the Bank to restart QE next month, despite a small rise in core inflation - which strips out volatile commodity based measures - from 2.1pc to 2.2pc. Minutes to this month’s Monetary Policy Committee meeting are out on Wednesday and are predicted to show that at least two members voted for £25bn more QE, an increase on the previous month when there was only one vote for further stimulus.